Wednesday, August 27, 2008

Do layoffs help a company shore up its financial position?

Since 1995, Wayne Cascio, a professor of management at the University of Colorado Denver, has been studying how companies fare following implementation of layoffs aimed at cutting costs. The conclusions he draws from this research are summarized in an interviewDavid Creelman published at hr.com in 2006.

A key question from Creelman is "How do companies that see employees as sources of renewal respond when they are under economic pressure?" Cascio's answer:

I found, counterintuitive to companies that see their people as costs, that the best companies get people involved. They see their people as part of the solution instead of part of the problem. ...

There is a mental set that senior managers have when they see employees as assets. They think about downsizing as the last resort instead of the first one. I studied a little firm in Vermont called Rhino Foods. They are a specialty-dessert manufacturer. When times got tough they used teams of employees to come up with creative alternatives to laying people off. One of the things the company did was lend its employees to customers, suppliers and local businesses. The company was then able to bring the employees back in the spring when demand picked up for ice cream.

I call this a warehousing strategy  a warehousing of employees. ... It takes some creative strategies to work around the obvious solution of cutting people.

Cascio emphasizes that the best approach is not pre-determined. Instead,

... responsible restructurers go out of their way to communicate with employees through a lot of different media. They try to promote business literacy and help employees understand how the business works, how it finances itself and how it markets its products. This gives employees a better grasp of possible solutions. When you do this, people really sign on as partners and are willing to look for some creative alternatives.

The principle I would emphasize, based on observing behavior in management simulations I've facilitated, is that cutting costs, unless you're absolutely sure you're cutting fat, will compromise revenue. This is the fundamental reason that employee layoffs generally are not associated with improved financial results over the long term.